On September 1 of the current year, Scots Company experienced a flood that destr

Question

On September 1 of the current year, Scots Company experienced a flood that destroyed the company's entire inventory. Because the company had not completed its month end reporting for August, it must estimate the amount of inventory lost using the gross profit method. At the beginning of August, the company reported beginning inventory of $215,900. Inventory purchased during August was $192,710. Sales for the month of August were $543,400. Assuming the company's typical gross profit ratio is 40%, estimate the amount of inventory destroyed in the flood.

Explanation / Answer

Cost of goods sold = sales (1 -gross profit ratio)

                                   = 543,400 ( 1- .40)

                                   = 543400 *.60

                                  = $ 326040

Ending Inventory destroyed by fire =Beginning +purchase -COGS

                                                         = 215,900 + 192,710 - 326040

                                                        = $ 82570

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